Will the US dollar exchange rate continue to decline? A multi-dimensional analysis of the US dollar outlook for 2026

Whether the US dollar exchange rate can maintain a downward trend is a key issue in the current financial markets. From technical, policy, and fundamental perspectives, the dollar faces multiple pressures, with short-term risks of decline still present, but long-term outlooks require attention to the evolution of the global economic situation.

According to the latest market data, the US dollar index has been falling consecutively, currently at its lowest point since mid-last year (around 103.45), and has broken below the 200-day simple moving average, which is widely seen as a clear bearish signal. Weak employment data, ongoing market expectations of global central bank rate cuts, and declining government bond yields are all weakening the attractiveness of the dollar.

The Logic Behind the US Dollar Index — Why the Dollar Exchange Rate Is Under Downward Pressure

Definition and Composition of the US Dollar Index

The core meaning of the dollar exchange rate is the value or exchange ratio of a currency relative to the US dollar. For example, EUR/USD indicates how many dollars are needed to buy one euro. If EUR/USD=1.04, it means 1.04 dollars can buy 1 euro. When EUR/USD rises to 1.09, it indicates euro appreciation and dollar depreciation; conversely, if it falls to 0.88, it indicates euro depreciation and dollar appreciation.

The US dollar index is composed of six major international currencies (euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc) against the US dollar. The index’s level reflects the relative strength of these currencies. It’s important to note that the monetary policies of these countries often have internal consistency, so changes in the dollar index depend not only on US policy but also on whether the component countries have corresponding measures, for accurate assessment.

Key Pressures Currently Facing the US Dollar Exchange Rate

The Federal Reserve’s monetary policy significantly influences the dollar’s movement. Expectations of more frequent rate cuts increase the likelihood of dollar weakness; conversely, expectations of rate hikes or stability can support the dollar.

Recent data show clear signs of slowing global economic growth, with major central banks shifting toward easing policies, directly weakening the dollar’s appeal as a high-yield asset. Additionally, technically, the dollar has broken key support levels, and market sentiment remains bearish. However, in the short term, risk aversion demand may cause the dollar to rebound, but the long-term downward pressure persists.

Considering technical, macroeconomic, and market expectations, if global central banks continue rate cuts and economic data remain weak, the dollar could further decline, with support possibly below 102.00.

Lessons from Historical Cycles — 8 Periods of the Dollar Exchange Rate

Understanding the long-term patterns of the dollar is very helpful. Since the collapse of the Bretton Woods system in the 1970s, the dollar index has experienced eight distinct phases of fluctuation.

First Decline (1971–1980): Nixon’s administration announced the end of the gold standard, allowing gold and dollar prices to float freely, leading to dollar oversupply. The subsequent oil crisis caused high inflation, and the dollar depreciated below 90.

Second Rise (1980–1985): Fed Chair Paul Volcker aggressively fought inflation, raising the federal funds rate to 20% and maintaining high levels (8-10%), pushing the dollar index to a historic high by 1985.

Third Decline (1985–1995): Facing twin deficits (fiscal and trade), the dollar entered a long-term bear market.

Fourth Rise (1995–2002): Clinton’s administration’s re-election, the rise of the internet, and booming emerging industries drove strong economic growth, attracting capital inflows, and pushing the dollar index to around 120.

Fifth Decline (2002–2010): After the dot-com bubble burst, the dollar weakened amid 9/11 and quantitative easing policies, culminating in the 2008 financial crisis, with the dollar bottoming near 60.

Sixth Rise (2011–2020): Europe’s debt crisis, China’s stock market crash, and relative US stability, along with Fed rate hike expectations, supported the dollar’s appreciation.

Seventh Decline (2020–2022): COVID-19 pandemic led the US to cut rates to zero and flood markets with liquidity, causing the dollar to plunge sharply and trigger inflation.

Eighth Adjustment (2022–present): Surging inflation prompted aggressive rate hikes by the Fed, reaching 25-year highs, and quantitative tightening, successfully curbing inflation but challenging dollar confidence again.

These cycles reveal an important pattern: The long-term trend of the dollar is closely linked to global economic patterns, monetary policy cycles, and risk asset performance. When US relative economic strength weakens or global central bank policies diverge, the dollar tends to face downward pressure.

Major Currency Pairs Analysis — Relative Performance of the Dollar Against Other Currencies

EUR/USD: Euro/US Dollar Uptrend

The dollar exchange rate and the dollar index generally move inversely. Benefiting from dollar depreciation, ECB policy shifts, and improving economic outlooks, EUR/USD has shown a sustained upward trend. If global rate cuts and US slowdown expectations materialize, while Europe’s economy continues to improve, EUR/USD could keep climbing.

Recently, EUR/USD has risen to around 1.0835, indicating ongoing strength. If it stabilizes here, it may challenge key psychological levels like 1.0900. Technical indicators show previous highs and trendlines forming strong support, with 1.0900 as a critical resistance. Breaking above this could lead to further gains.

GBP/USD: Pound/US Dollar Volatile Uptrend

The UK economy is closely linked to the US, and GBP/USD’s movement is similar to EUR/USD. Market expectations that the Bank of England will slow rate cuts relative to the Fed support the pound. If the BOE adopts cautious easing, GBP could strengthen against the dollar, pushing GBP/USD higher.

Technically, GBP/USD is expected to remain in a volatile upward range, roughly between 1.25 and 1.35. Diverging policies and risk sentiment are main drivers. If UK and US policies diverge further, the pair could challenge 1.40 or higher, but political risks and liquidity shocks could cause pullbacks.

USD/CNH: US Dollar / Chinese Yuan Range

USD/CNH is influenced by market supply and demand, as well as US and Chinese economic policies. If the Fed continues easing and China’s economy remains adjusting, the yuan could weaken further, pushing USD/CNH higher. The People’s Bank of China’s exchange rate policies and market guidance will also impact the yuan.

Technically, USD/CNH may trade sideways between 7.2300 and 7.2600, with limited short-term breakout momentum. Investors should watch for breaks of this range. A break below 7.2260, especially with oversold signals, could offer short-term buying opportunities.

USD/JPY: US Dollar / Japanese Yen Testing Downside

USD/JPY is one of the most liquid currency pairs. Recent Japanese data show wages rising at the fastest pace in 32 years, indicating potential shifts in Japan’s long-standing low inflation, low wage environment. Rising wages and inflation pressures could prompt the BOJ to adjust policy. International pressures, especially from the US, might accelerate rate hikes.

From technical and fundamental perspectives, USD/JPY may trend downward. Expectations of global rate cuts and Japan’s economic recovery support this. If USD/JPY falls below 146.90, further declines toward recent lows are possible; a break above 150.0 would be needed to reverse the downtrend.

AUD/USD: Australian Dollar / US Dollar Relative Strength

Australia’s economic data are strong, with GDP growth and trade surpluses exceeding expectations. The RBA remains cautious, with low likelihood of rate cuts, supporting the AUD relative to other major currencies.

Despite positive data, potential dollar correction and global uncertainties remain. If major central banks continue easing, the dollar could weaken, providing upward momentum for AUD/USD.

Seizing Trading Opportunities in Dollar Fluctuations — Short-term Volatility and Medium-to-Long-Term Allocation

Short-term Strategies (Next 1-2 Quarters): Structural Fluctuations and Swing Trading

Bullish dollar scenarios: Escalating geopolitical conflicts boosting safe-haven demand could push the dollar index rapidly to 100–103; strong US economic data (e.g., non-farm payrolls exceeding 250,000) could delay rate cut expectations, supporting the dollar.

Bearish dollar scenarios: Continuous rate cuts by global central banks and delayed ECB policy easing could strengthen the euro, dragging the dollar index below 95; worsening US debt issues might trigger credit risks, depressing the dollar.

Aggressive traders might consider high-low trading within the 95–100 range, using technical signals (like MACD divergence, Fibonacci retracements) to catch reversals. Conservative investors should wait for clearer Fed policy signals before acting.

Medium to Long-term Strategies (Beyond Six Months): Transition from Dollar to Non-US Assets

As global easing deepens, US Treasury yields will narrow, prompting capital flows toward high-growth emerging markets or recovering Eurozone. If de-dollarization accelerates (e.g., BRICS promoting local currency settlements), the dollar’s reserve currency status could weaken further, pressuring the dollar lower.

Long-term, it’s advisable to gradually reduce dollar long positions and increase holdings in reasonably valued non-US currencies (like yen, AUD) or commodities (gold, copper). This approach helps hedge against dollar depreciation and captures global capital reallocation opportunities.

Key Insight: Data-Driven and Event-Sensitive

The dollar’s future performance will increasingly depend on “data-driven” signals and “event sensitivity.” Investors must stay flexible and disciplined to capture excess returns amid volatility. Close monitoring of central bank meetings, economic releases, geopolitical events, combined with technical analysis, will form a comprehensive trading system.